Central Bank of India (CBI) is entering the capital market with an initial public offering of eight-crore equity share of Rs 10 each at a price to be decided through a 100% book-building process. After the issue, the shareholding of the Union government in the bank will come down to 80.20%.

The main objective of the issue is to augment its capital base to meet Basel II standards. End March 2007, CBI’s capital adequacy ratio (CAR) stood at 10.4% (Tier I CAR: 6.32%) as against Reserve Bank of India (RBI) stipulation of 9%. The bank also intends to grow its assets in sync with the growth of the Indian economy, primarily the loan and investment portfolio.

CBI plans to expand significantly the number of branches to 1,000 under central banking solution(CBS) so as to cover approximately 80% of the business by the close of financial year ending March 2008 (FY 2008). Also, the bank has set a target to increase its ATMs to 500 from 261 (end March 2007) by end of this fiscal.

Strengths

• Has pan-India presence with branches in 27 states and three Union Territories. End March 2007, the bank operates with 3,194 branches and has the third largest network of branches in India: 1,341 rural branches, 759 semi-urban, 575 urban and 519 metropolitan branches.
• The low-cost deposit current and savings accounts (CASA) constitute almost 42.09% of the total deposits end March 2007. The bank stands next only to SBI in maintaining a high CASA in its books. Going forward, it aims to further increase the low-cost deposits by leveraging the branch network and customer base, particularly in the rural and semi-urban areas.

Weaknesses

• The gross NPA to gross advances stand at 4.81% and the net NPA at 1.70% of the net advances end March 2007. These are relatively higher compared with industry peers.
• Huge exposure to priority-sector lending, historically carrying high NPAs compared with non-priority sectors. This is evident from the fact that gross NPAs comprised 7.99% of priority sector advances, End March 2007, priority sector lending stood at 43.55% of the net credit. Of this, loans to agriculture and small-scale industry borrowers stood at around 17.91% and 6.58% of the net credit.
• Business per employee stood at Rs 3.76 crore in FY 2007. This is one of the lowest among comparable PSU banks. This indicates excess staff or low productivity of staff.
• End March 2007, central banking solution had been implemented in 324 branches and 29 extension counters covering only 35% of the business. This is far below many other banks.
• The financial track record is not encouraging. Profit fell between FY 2004 to FY 2006. Even in FY 2007, net profit jumped only because of fall in provisions.
• Current paid-up capital stood at Rs 324.14 crore. This is after restructuring its capital base on March 2002, by netting off accumulated unabsorbed losses of Rs 681.31 crore against paid-up capital. End March 2007, the balance capital of Rs 1124.14 crore was restructured to convert Rs 800 crore in perpetual non-cumulative preference share capital and Rs 324.14 crore in equity share capital. So, the current book value of around Rs 77 is earned not because of good operational performance in the past, but largely because of the restructuring of equity.

Valuation

EPS for the year ended March 2007 on post-issue equity works out to Rs 12.3.
Nevertheless, profit for FY 2007 includes recovery / writeback of provisions of Rs 163.33 crore, and a repeat of such recovery every year seems difficult.

The price band of Rs 85- Rs 102 gives P/E band of 6.9 to 8.3 times FY 2007 EPS on post-IPO equity Among the comparable banks, Allahabad Bank and Syndicate Bank trade at P/E lower than the lower band. Other comparable banks like UCO Bank and Indian Overseas Bank trade within this band. Only recently-listed Indian Bank and Oriental Bank of Commerce are trading above the upper band P/E. The price band gives price (P) / book value (BV) band of 1.1 to 1.2 times post-issue BV and 1.5-1.7 times P/adjusted BV (after deducting NPAs). Currently, Allahabad Bank, UCO Bank and OBC are trading around P/BV of around 1.1. Allahabad Bank and OBC are also trading at lower than P/adjusted BV of 1.5 though other comparable banks are trading around or above 1.7 times P/adjusted BV. Overall pricing has been done to keep the offer interesting, though the valuation is not as low as it appears.